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How to spot pullback trade zones with the Heiken-Ashi

How to spot pullback trade zones with the Heiken-Ashi
Asked by
Paul Beck time-icon1 month ago
1 Answer Answer Question

Steve Walters
Answered time-icon1 month ago

Pullback trading is popular among traders because of its simplicity. Using the Heiken-Ashi candlesticks is even easier.

Traders who use the Heiken-Ashi candlesticks find it simple to analyse price action on a trading chart. Even though it excludes some price details, it helps traders highlight some primary features.


How do you know the exact point a trading pullback ends?

This question is relative.

Pullback traders fond of making early guesses are most likely to enter a trade early before a pullback ends.

Such traders stand the chance of putting their position at risk when price experiences an adverse movement. In such cases, the trade can have a stop out if the stop-loss isn’t wide enough.

In contrast, traders who make late guesses are likely to enter a trade at an inferior price as they meet a trend that is already on the move.

Therefore, there is no perfect answer here. However, with the Heiken-Ashi tool, a trader can identify the end of a pullback.


How the Heiken-Ashi helps us locate the end of a pullback

There are two Heiken-Ashi patterns a trader should look out for before identifying pullbacks:

  • The Bearish Shaved Head: A bearish candlestick with no wick at the head
  • The Bullish Shaved Bottom: A bullish candlestick with no wick at the bottom

When a pullback occurs in an uptrend, a trader must wait to see a Bearish Shaved Head as it signifies the end of the pullback.

The Bearish Shaved Head is what most traders wait for in a trade to identify a downward momentum in a pullback.

The next thing would be to find the first successive candlestick that’s not a Bearish Shaved Head. The first successive candlestick is the zone candle. It shows the end of the downward momentum and cues the end of the pullback.

Traders can’t tell exactly when to enter the market with the Heiken-Ashi method. That’s why they look out for the zone candle to project the pullback zone.

The zone doesn’t provide a trigger point for traders. Instead, the zone candle gets the trader into the zone. It tells them to get ready for the end of the pullback and stay in the right position as the trend restarts.

The last part of the strategy is to find price action entries around zone bar level. It could be something as simple as the bullish two-bar reversal pattern.


Trading tips for the Heiken-Ashi pullback zone

The benefit of spotting trading zones as opposed to triggering points is that it permits more entry techniques. Here are some possibilities that a trader can use:

  • Oscillator entries: Traders can use oscillator indicators that show overbought or oversold in partnership with the pullback one to enter trades. An example of such an oscillator indicator is the stochastic oscillator.
  • Candlestick/bar patterns: A trader can use various candlestick patterns depending on what is workable. Some traders use a simple two-bar reversal pattern, while others use a simple engulfing pattern.
  • Entering the trade with a limit order around the middle of the spotted pullback zone: A lot of professional traders use this approach with a volatility stop-loss.

The image below shows the Heiken-Ashi candle chart in an uptrend.

The above example is the Heiken-Ashi candle showcasing its strength in a pullback zone of the prevailing uptrend.

It appears that the Heiken-Ashi candle formed four different zone candles during the pullback, which made the confirmation stronger.

Finding the right time to enter a buy position was the only snag. In this case, a professional trader would look for a chart reversal pattern or combine it with other indicators to identify the entry point.

For this EUR/USD chart, the pin-bar reversal candle was the setup candle to confirm the pullback was over. After that, we see price moving in an upward direction.

Here’s another image showing the Heiken-Ashi candle chart in a downtrend.In the same EUR/USD chart with a one-hour time frame, we see several zone candles forming at the pullback zones of the prevailing downtrend.

We also see setup candles that can help us know when the pullback is over and when to enter the market.

In this scenario, a trader can make quick daily profits from the various sell positions.


The bottom line

The Heiken-Ashi candles don’t show the true price like the normal Japanese candlesticks. Instead, they show the average that requires the prior candle to open or close to create part of its calculation.

Therefore, it’s not wise to treat the Heiken-Ashi candle chart like the regular Japanese candlestick chart that shows true price action.

Traders can only take advantage of its simple nature to create a great pullback strategy in a prevailing trend; it is risky to trade using just the Heiken-Ashi method without adding other key trading tools.

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